New Enroll in our GIC Finance Online Course Here!

    Register

    Question

    Country A can produce 10 units of cloth or 5 units of

    wine in a day. Country B can produce 6 units of cloth or 4 units of wine in a day. Which country has the comparative advantage in the production of cloth and wine?
    A Country A has the comparative advantage in both cloth and wine. Correct Answer Incorrect Answer
    B Country B has the comparative advantage in both cloth and wine. Correct Answer Incorrect Answer
    C Country A has the comparative advantage in cloth, and Country B has the comparative advantage in wine Correct Answer Incorrect Answer
    D Country B has the comparative advantage in cloth, and Country A has the comparative advantage in wine Correct Answer Incorrect Answer

    Solution

    Comparative advantage is determined by comparing the opportunity costs of producing goods between countries. Opportunity Cost Calculation:

    • Country A:
      • Opportunity cost of 1 unit of cloth = 5/10 = 0.5 units of wine
      • Opportunity cost of 1 unit of wine = 10/5 = 2 units of cloth
    • Country B:
      • Opportunity cost of 1 unit of cloth = 4/6 = 0.67 units of wine
      • Opportunity cost of 1 unit of wine = 6/4 = 1.5 units of cloth
    Comparative Advantage:
    • Country A:
      • Lower opportunity cost in producing cloth (0.5 < 0.67)
    • Country B:
      • Lower opportunity cost in producing wine (1.5 < 2)
    C) Country A has the comparative advantage in cloth, and Country B has the comparative advantage in wine.

    Practice Next